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On paper, Harbour Energy (LSE:HBR) is the best dividend share to own right now. Based on its 2024 payout of 26.19 cents per share (19.96p at current exchange rates), the stock’s currently (11 April) yielding an impressive 12.9%. According to Trading View, this beats all others on the FTSE 350.
As a shareholder, this should make me happy. After all, where else could I earn a return like this? At the moment, high-interest savings accounts, government bonds and rental yields don’t come close to this figure.
But I’m not happy. In fact, I’m a little concerned.
Difficult times
That’s because the stock’s current yield is only relevant for those who buy today.
I first invested a few years ago, when the share price was much higher. Since April 2020, it’s fallen by 75%. Although I’m not sitting on such a big paper loss, my yield’s closer to 6%.
Okay, this is still much better than the FTSE 250 average of 3.65%. But the generous dividends I’ve received don’t adequately compensate me for the loss of capital.
And the sharp decline in the share price shows no sign of slowing. Over the past six months, it’s down over 40%.
Some will point to a fall in the oil price as the principal cause. But this isn’t the full story. Sometimes, stocks fall out of favour for no obvious reason.
Brent crude only started to tumble as a result of President Trump’s on-off tariff policy. Since the start of April, it’s tanked 15%. Until then, it had been relatively stable over the past year or so. However, the threat of a global ‘trade war’ is weighing heavily on the price of oil.
And a falling oil price means lower earnings for Harbour Energy. In March, the group confirmed that, for its 2025 financial year, it intended to return at least $455m to shareholders by way of dividend.
This was underpinned by an expectation — based on an oil price of $80 a barrel and a European gas price of $13 per mscf (thousand standard cubic feet) — that it would generate $1bn of free cash, before shareholder distributions.
However, the company also disclosed that this level of cash will change by +/- $100m for every $5 movement in the oil price and $1 variation in the gas price.
Brent crude is currently trading at $63. If this persists for 12 months, the group’s free cash flow will be $340m lower. Fortunately, gas remains in line with the group’s planning assumption.
What does this mean?
In my opinion, this highlights the biggest risk associated with investing in energy stocks, namely potentially volatile earnings. This makes dividends particularly precarious in the sector.
I still think Harbour Energy has plenty going for it. Following its recent acquisition of the Wintershall Dea portfolio, it’s no longer reliant on the North Sea. Some of its earnings now fall outside the scope of the UK government’s ‘windfall tax’. Also, its operating costs have fallen as a result of the deal.
And although I’m not earning a near-13% yield, income investors could consider the stock for its generous return. However, they should be aware of the industry-specific risks and be mindful that if the oil price remains at its current level (or lower), the group’s dividend may come under pressure.
